ATAD Luxembourg Implementation: Exit taxation

On 18 December 2018, the Luxembourg Parliament (Chambre des Députés) approved the draft law n°7318 (the "ATAD Draft Law"), which implements into domestic law the EU anti-avoidance directive of 12 July 2016 ("ATAD").

In a nutshell: what is exit taxation?

Exit taxation is a tax applied on entities that cease to be a tax resident in a given country. This tax is generally triggered upon transfer of asset or a change of domicile or tax residency of a taxpayer and is usually applied on unrealized capital gains.

The aim of the exit taxation rules is to prevent companies from avoiding tax by relocating assets.

Are the exit taxation rules a new concept for Luxembourg?

No, current exit taxation rules already exist in Luxembourg. Indeed, paragraph 127 of the Luxembourg general tax law (Abgabenordnung - "AO") gives currently the possibility to postpone, under certain conditions, the tax at exit indefinitely.

What has changed if the concept is not new?

The changes are rather significant.

First, Luxembourg has changed the valuation rules in cases of certain cross-border transfers of assets (inbound and outbound) to be in line with the provisions of article 5 of ATAD dealing with exit taxation.

Second, contrary to the past where a tax deferral could be requested under certain circumstances for an unlimited period of time, the new rules will only provide for the mere possibility to spread - in equal instalments - the tax payment at exit over a maximum period of five years.

Third, the territorial scope has changed. Indeed, currently, a deferral may be requested in case of a transfer to another Member State, an EEA State (other than an EU member State) or a country or with which Luxembourg exchanges information in the field of taxation. Under the new exit taxation rules, a deferral may only be requested in case of a transfer to either another Member State or an EEA State with which Luxembourg or the EU has concluded an agreement on the mutual assistance for tax recovery.

What exactly are these inbound and outbound valuation changes previously mentioned?

(a) Inbound valuation

Article 35 LITL provides for the principles applicable to the valuation of the assets and liabilities for tax purposes in case of the set-up of an enterprise or an autonomous part of business.

This article will now be amended to include a provision regarding the valuation of assets and liabilities of a taxpayer that transfers its tax residency or habitual place of abode from abroad to Luxembourg, or of a resident taxpayer that transfers to Luxembourg its activity which was previously exercised through a foreign permanent establishment. In those scenarios, Luxembourg will take over the valuation of the assets and liabilities determined by the foreign country, except if this valuation is not in line with its going operating value ("valeur d'exploitation"). The aim is here to be in line with the symmetry principle set forth by the ATAD, which requires the state of destination to take over the values assessed by the exit State in the context of exit taxation. To be noted that Luxembourg took the decision to not limit this provision to transfers from other Member States but to apply it to transfers from any State to safeguard its uniform application.

This valuation will be used as acquisition value in case of a subsequent transfer of asset/enterprise outside Luxembourg to ascertain the amount of any capital gain realised.

Finally, the amended rule specifies that the acquisition date of the assets is the actual date of acquisition of these assets. As such, the historical acquisition date is not interrupted.

(b) Outbound valuation

Article 38 LITL deals with the taxation of profits realised upon the transfer of a Luxembourg enterprise or a permanent establishment to another country. The ATAD Draft Law introduces now 4 cases in which the transfer of an enterprise, a permanent establishment or an asset to another country is considered as a disposal at fair market value. These cases are the following, unless Luxembourg continues exercising its taxing rights (e.g., if the assets are allocated to a Luxembourg permanent establishment):

the taxpayer transfers specific asset(s) from its enterprise located in Luxembourg to a permanent establishment situated in another country;

the taxpayer transfers specific asset(s) from its permanent establishment located in Luxembourg to its enterprise, head office or permanent establishment situated in another country;

the taxpayer transfers to another country either (i) its domicile or its usual abode or (ii) its legal seat and its central administration to another country; or

the taxpayer transfers its activity exercised through its Luxembourg permanent establishment to another country.

Article 38 LITL applies irrespective of whether the host country is located in the EU, in the EEA or any other countries. In addition, contrary to the current version which only tackles transfer situations of enterprises or permanent establishments, the amended article 38 LITL will also cover the transfer of business assets. Finally, article 38 LITL also provides for several cases where its provisions will not be applicable, especially where the transfer is temporary or required to satisfy prudential obligations.

How will the tax deferral work under the new exit taxation rules?

As explained above, under the new rules, a taxpayer may merely request to spread in equal instalments the tax payment at exit over a period of maximum five years, provided the transfer occurs to either another Member State or a EEA Member State other than an EU Member State with which Luxembourg or the EU has concluded an agreement on the mutual assistance for tax recovery.

To be noted that the ATAD Draft Law foresees expressly that the taxpayer may renounce to spread the tax payment. This may be considered astonishing as the benefit of this provision requires a request by the taxpayer. However, in our view, this is to be understood as a clarification that a taxpayer may always renounce to spread its tax payment, even if previously requested.

Are there guarantees to be given, or are interest to be paid in case of a tax deferral?

No, this hasn't changed. No guarantees need to be given by a taxpayer in case of a request for a tax spreading, nor will interest be charged on such instalments.

Are there situations where the tax deferral will be ended immediately, even before the period of 5 years?

There are indeed situations in which the right to spread the exit tax is immediately stopped, and the balance of the tax debt becomes immediately due. Those situations include for instance certain subsequent transfers of the assets transferred, the bankruptcy or liquidation of the taxpayer itself, the failure to pay instalments when due (with a cure period not exceeding twelve months however), or the failure to document annually and in due form the fact that certain of these harmful events (i.e., events that immediately stopped the tax spreading) have not occurred.

When will this rule be applicable?

The exit taxation rules will be applicable to financial years as from 1 January 2020.

A transitional measure exists for deferrals granted for financial years closed before 1 January 2020, which will thus not be affected by the new exit taxation rules.

What will be the impacts of the exit taxation rules in Luxembourg?

Whilst the concept, well known in Luxembourg, was reshaped not so long ago, the new rules will now only provide for the mere possibility to spread the tax payment at exit over a period of maximum five years but also reduce the scenarios where such request can be made. The choice to include this limitation, which goes beyond the minimum of what was imposed by the ATAD, may be unwelcome. However, we can understand the desire of the Luxembourg legislator to deal differently with exit tax payments for administrative and cash management purposes. Further, whilst this limitation will have a certain negative impact, its consequences for the Luxembourg financial actors should be limited as, in our experience, the need to rely on such exit tax deferral is not very common.